China causes nervousness in financial markets

Political and economic uncertainty continued to cause volatility in financial markets in July. However, equity markets remain supported due to the hunt for yield.

Review – Political risks weigh on emerging market equities

China’s  regulatory  offensive  focusing  on  large  technology  companies as well as companies from the real estate and education sectors weighed heavily on regional stock markets.  Not  surprisingly, their valuations were  exposed  to  political  risk,  which  was difficult to accurately evaluate. Although the  Chinese  regulators  tried  to limit the damage and the markets stabilised at  the  end  of  the month, the MSCI Emerging Markets ultimately lost 6.7% in July. Although the heightened uncertainty was also reflected in equity markets of industrialized countries, these were recently weighed down rather by  growth  concerns  due  to  rising  COVID-19  case numbers. In the end, only for a short period of time and mainly at the expense of cyclical equity market regions such as Europe  (+1.9 %). US  equities (+2.3 %) on the other hand benefited from stronger capital in- flows into growth and technology companies, not least due to further declining (real) yields.

The decline in yields on the government  bond  markets  continued in July. Ten-year U.S. government bonds fell below the 1.30 % mark in the course of the month, and German bunds  of the same  maturity have once again solidified clearly in negative territory. Investment grade bonds on both sides of the Atlantic (EUR +0.8 % / USD +0.7%) benefited strongly from  this  development.  Emerging  market bonds also ended the month in positive territory  (+0.5 %)  despite high uncertainty in the Asian region. High yield bonds also posted a positive return of 0.4 % in July. However, a slight increase in credit risk premiums weighed somewhat on the asset class recently.

The commodity sector (+1.8 %) remained supported despite eco- nomic uncertainty in July. After an initial period of weakness due to the expansion of the oil production by the  OPEC+  countries,  the price of crude oil rose (+1.6%) compared  to  the  previous month. Gold (+3.3 %) has also  been able  to stabilise in recent  weeks  after the heavy losses in June and ended the month slightly above USD 1800 per troy ounce.